Japan’s equally-generous but a bit more alarming debt-to-GDP ratio of ~263% have contributed to fears about sovereign stress spreading around the world. This historic number, one of the highest globally, shows no sign of slowing down. More importantly, it signals economic instability, not just for Japan, but for all countries grappling with high debt levels.
That data shows a striking divergence of Japan from all other big global economies. Italy is next, at about 135% debt-to-GDP, and the US is right behind at 123%. Debt levels in the United Kingdom (101% of GDP) and Canada (107%) are high when compared internationally, as is France (111% of GDP). By contrast, Germany, the Netherlands, Switzerland, and Sweden have much lower ratios—63%, 68%, 71%, and 77% respectively.
Japan’s fiscal situation is made much worse by its bond market situation. The spread between Japan’s 30-year bond yield and the Bank of Japan’s policy rate has reached 263 basis points. For investors and policymakers, it’s a confusing time. The country has been living for a long time with subpar growth and demographic headwinds.
Italy’s high debt is due to long-term budget deficits and low growth. The dangerous mix of all these factors has made the country particularly exposed, ringing new bells of concern over the sustainability of its fiscal policies. Otherwise, Italy risks some terrible outcomes, particularly in the context of its overall financial stability, caution economists.
Today, the United States’ debt has skyrocketed. This dramatic rise is primarily fueled by explosive spending on defense, healthcare and the recent tax cuts. With the nation’s debt and deficit deficits providing plenty of heat and controversy in national political circles. As concerns around inflation and rising interest rates increase, demands for greater fiscal responsibility are growing louder by the day.
Debt levels in Canada have skyrocketed, primarily due to COVID spending and wide-ranging economic relief and support. As the country begins to put the crisis behind it, questions of fiscal responsibility and where to invest moving forward are in the national conversation.
The United Kingdom has felt these same pressures after Brexit-related economic recalibrations and the necessity for greater public spending. The fiscal impacts of these reforms has added to an escalating debt load that stands to jeopardize any economic recovery that may be ahead.
Germany’s relatively low debt-to-GDP ratio of around 63% is a result of its robust economic growth and responsible fiscal management. The Netherlands, Switzerland and Sweden hold even lower ratios, a testament to their fiscal discipline and their strong economic structures.
As countries around the world chart their way through complex debt landscapes, Japan’s recent numbers are a wake-up call. With global economies so deeply intertwined, increasing debt in one country could lead to a domino effect internationally. With an eye toward the horizon, investors are watching these developments with a careful eye, balancing rising risk with opportunity in a more dynamic financial environment.